From "Random Walk Guide to Investing" ... book coming out (plug!).
We get 5 of the 10 tips.
Don't listen to brokers, they don't know more than you. Nobody knows. There are 3 types of financial advisors, those who:
- don't know
- don't know they don't know
- know they don't know, but will give you advice anyway
Sum of all their advice is nil. Zip. Zero. Nada.
Stocks recommended to buy do no better than sell recommendations. Turn off the TV, 95% of the advice is junk.
Steve Forbes: realized that the way to get rich from financial advice is to sell it, not use it.
Terrible conflicts of interest! Analysts working for I-banking firms are paid to be bullish, not accurate. Brokers are looking out for themselves, not you.
Can never be cynical enough.
Time = money.
- Einstein (paraphrased): "Compound interest is the greatest force of all time."
- If George Washington had put $1 in the stock market back then, 200 years later worth $8 million!
- Ben Franklin: "The money that money earns earns money." That is, you get interest, which adds to your total, which earns more interst...
Rule of 72 (link)
Begin savings program NOW. Your money in retirement depends on how much
you put in NOW
Saving tips
- Pay yourself first (don't spend all of paycheck, put some away automatically). Gives you discipline, get tax benefits.
- Do the 401k plan! Take advantage of employer matching contributions. Sign up right away, max it out
- IRA as well
TIME rather than MONEY is important.
"The $1 Million dollar difference". Bob and John are twins. Bob invests $2000 a year from age 20 to 40, then stops. John invests $2000 a year from age 40 to 65.
- John put more money in (25 years vs. 20)
- Bob has $1.2 Million, John only has $200,000
The amount of TIME rather than TIMING matters. Start early!
"Save more tomorrow" - Kahneman prospect theory. Basically says humans are very risk averse. A dollar of loss gives us twice as much pain as the benefit from a dollar of gain. (i.e., loss = 2 units of pain, gain = 1 unit of pleasure). So humans avoid loss!
It's hard to start saving: taking a dollar away is painful. "I can't save, I'm spending every nickel."
- Solution: take away future dollars, i.e. dollars of gain
- Put part of your next raise away for savings (get deal with employer). This way, you are giving up future benefits, just getting less gain than before. People more willing to do this.
Opportunity Cost: The true cost of something is what you gave up to get it. I.e, you have $2. If you get Chicken McNuggets, you are giving up the chance for a Big Mac.
Example: Suppose you see a movie every week (in the theater). Try renting a movie once a month instead, save about $300 bucks a year. Now, the opportunity cost of the movie isn't just 300 bucks a year. Over 40 years, that is $600,000 in savings!
So, ask yourself this: Is seeing a movie once a month worth $600,000 of your
retirement?
[Also, see my notes on quick finance calculations. Saving $20 bucks a week is $1000/year!]
When investing: diversify, diversify, diversify. Applies to life as well.
Horror story: Woman works for Enron. Invests in Enron's retirement plan, has option to buy Enron stock. She does (all her retirement is in Enron stock). Great during 90's, Enron booming. Portfolio worth $2.5 million, she wants to retire, travel, etc. Then scandal happens. She loses her JOB, and her nest egg goes to ZERO. Double whammy. Ow.
Don't have the same risk for your income and your retirement
Buy BROADEST possible stocks, like an index fund (mutual fund with a share for every company, basically like buying a piece of the entire stock market).
Diversify over time: Dollar cost averaging. That is, put in $200 a month, every month. When stocks are up, you get less of them. When stocks are down, you get more of them.
Warren Buffet's observation:
- If you are looking to eat hamburgers forever, do you want high or low hamburger prices? (Low.)
- If you will always be buying cars, do you want high or low prices? (Low.)
- If you plan to save money, want high or low stock prices? (Low.)
But most analysts will say high! If you are buying stock that is high, it isn't a good deal for you!
BUYERS want low prices, SELLERS want high prices.
Malkiel's recommendation: In 20's, have portfolio:
- 75% stock (65% index fund, 10% real estate funds)
- 20% bonds
- 5% cash for emergencies (Money market funds)
Mutual funds have operating costs, sales charges. These are important! Can eat away at your savings.
What if a mutual fund said "Invest with us! When you take out your money, we'll take 50% as a fee." You'd say "Hells, no!".
- But wait. Suppose return is 8%, but fund has a 2% fee.
- $1000 at 8% for 40 years = 22,000
- $1000 at 6% for 40 years = 10,000
- So they took half your money!!! The magic of compound interest turns into a tyranny. The money they are taking out is NOT earning more.
There were congressional hearings about mutual funds hiding their expense ratio.
Best-performing funds have the lowest expense ratios. Simple fact.
NEVER buy fund with "load fee". If broker says "no commission" is hiding the truth -- there is a commission, don't believe them. Your $1 dollar only buys 94 cents of stock. That's the commission.
NEVER accumulate credit card debt. Rip them up if you have to. Charge 18%, 20%. That's an investment from the bank in YOU. Sure way to get poor.
Markets are reasonably efficient. By the time you hear the news, it's already in the stock price. How many other people are watching CNBC? How many people knew about it before CNBC?
Last year: index fund outperformed 70% of mutual funds. Over 10 years, index outperformed 80%.
- Why not just pick the "winning funds"? You can't know beforehand. The
funds that do great today fail tomorrow. Not consistent.
- Index fund: the "Wilshire 5000". Basically a fund with every single
stock in it. It's like having a slice of the market.
Q: Baby boomers getting old. Invest in health care, companies to service elderly?
Ans: Probably already reflected in stock price. If you know something nobody else knows, then no, not reflected. But other people know this.
Anythnig you can do to avoid taxes, do this. 401k and IRA tax deductible [put link].
Roth IRA is great
- no taxes when you take money out!
- can only have Roth if income under a certain amount. Not for ibankers.
Expense ratios: 0.2% or LESS (have to do your work to find ratio for a fund)
DATA IS CLEAR: top mutual funds have low expenses
